What Would Digital Shop ICrossing Bring Hearst?

WSJ Report of Merger Inspires Some Head Scratching

NEW YORK (AdAge.com) -- Hearst is poised to acquire iCrossing, one of the last big, independent digital agencies, according to a Wall Street Journal report. But with this acquisition's strong heritage in search marketing, the question remains: Why would a publisher want a search shop?

"If you're selling media, what do you do with search? I don't know. It doesn't make sense," said Michael C. Seidler, CEO of Madison Alley. "Meredith makes sense -- they sell media, so they can do custom publishing and custom digital marketing to broaden its offering, which they've done well."

Compare that model to iCrossing, which is the largest U.S. search agency by 2008 revenue, according to Ad Age DataCenter. Founded in 1998, the Scottsdale, Ariz.-based agency has made attempts to diversify its services beyond search, though some have called those attempts unsuccessful. ICrossing acquired web development shop Proxicom in 2007, but that integration is said to have gone badly.

ICrossing also offers services in mobile and analytics, though 50% to 60% of the agency's revenue comes from search, according to a spokesman. Across 12 offices, iCrossing counts Bank of America, Toyota Motor Sports and Sears as clients, and it had $120 million in U.S. revenue in 2008, according to Ad Age DataCenter. The agency has attracted $125 million in funding from Goldman Sachs, Oak Investment Partners and other investors.

For now, Hearst and iCrossing are quiet about the reported merger talks. "We engage in many explorations, but as a matter of policy don't comment on possible transactions," said a Hearst spokesman. "While going through the process of evaluating iCrossing's position in the market, we have spoken with and entered into non-disclosure agreements with many companies," said an iCrossing spokesman via e-mail. "It would be inappropriate to disclose the details of any of these discussions."

Late last year the Wall Street Journal reported Hearst made an unsolicited offer for iCrossing, adding that potential buyers also included holding companies Aegis and WPP.

Comparisons to Meredith
If it goes through, this deal would speak volumes about the difference between Hearst's agency acquisition strategy from that of Meredith Corp. According to the reported terms, Hearst will get one large shop for a price tag as high as $375 million. Compare that to Meredith's multiple acquisitions across social media, digital, database and consumer relationship management -- all functions that dovetailed nicely with the publisher's existing custom-publishing unit. What's more, execs familiar with the matter estimate Meredith's total acquisitions, taken in $20 million to $30 million chunks, would come in at less than $375 million.

"If you're going to pay the valuation they are talking about, you have to think there are synergies that are going to help the media side of the business," said one exec familiar with the matter. "It will be difficult to achieve the synergies at the scale [Hearst] are taking on."

Under such a deal with iCrossing, Hearst, the publisher of Esquire, Good Housekeeping and daily and weekly newspapers, would automatically add 550 digital agency employees. In contrast, Meredith has built its staff of 550 through multiple acquisitions since 2006. Longtime digital agency exec Martin Reidy heads Meredith Integrated Marketing, which encompasses the acquisitions of digital agencies O' Grady Meyers and Genex; social media shop New Media Strategies; database marketing agency Directive; and health-care marketing specialty Big Communications. Last summer, Meredith bought a stake in mobile agency The Hyperfactory.

"What Meredith did was buy creation, which also helps advertisers build customer programs," said Rob Norman, CEO of Group M North America. "What Hearst is doing is buying assets to help distribution ... and, sure, if Hearst is creating content on behalf of clients, they'd want to offer their agencies their best distribution for that content."

Though investment banker John Prunier of Petsky & Prunier doesn't think the acquisition needs to ultimately serve Hearst's existing business -- it's potentially a move to create revenue streams outside of media sales to help diversify the company, he said. What's more, as a family-owned business, Hearst has the leeway to make an investment that doesn't directly mesh with its existing portfolio of assets.

"Hearst probably felt they needed to buy a well-scaled business and serve those clients directly instead of through the media entities," Mr. Prunier said. "In time, they can look for ways to cross-sell." But for iCrossing to make any lasting impact on Hearst's publishing business, the acquisition, by necessity, must be able to compete with such a large organization, he added. "If you don't buy something big enough, it's not going to have enough power to change long-standing behavior."

Home team advantage
The one big benefit Hearst could get from a digital agency with strong search chops, of course, is optimization of its properties.

"There's a lot of work they can do for their own sites that provides internal benefit," Madison Alley's Mr. Seidler noted. "If they can drive more users to their own sites, that will directly benefit clients. Beyond that, if someone is buying online media, they drive users to visit."

Along with optimizing Hearst sites for search and driving traffic to its online properties, a search agency could also bring a publisher analytics expertise.

"They are going to have strong analytic insights into audience behavior on digital platforms," Rapp global president Paul Price said of the deal. "They'll be able to sell to marketers more insight into the way Hearst users are engaging with platforms. If they leverage what iCrossing is expert in, they'll have some valuable diagnostics."